Fraught relations with some international oil companies (IOCs) are expected to deter interest in Equatorial Guinea’s planned offshore bidding round due to open in June. New investment in the energy sector is critical to the government, which relies on hydrocarbons for the bulk of its revenues and has failed to adequately diversify the economy.

Regulatory uncertainty and high levels of corruption present long-term reputational and political risks for investors that threaten efforts to attract new investment.

Uncertainty over a major planned floating liquefied natural gas project in April is a setback for the government. However, this development reflects wider market difficulties and reduced appetite among investors for capital intensive projects rather than a lack of confidence in the Equatorial Guinea market specifically.

In late May, the Equatorial Guinean energy ministry confirmed it would unveil blocks for a licensing round at an industry conference in Cape Town on 6-7 June. The ministry first announced its intention to hold a bidding round in late 2015 in a move intended to open up the country’s remaining deepwater and ultra-deepwater acreage to investors. Mines and Energy Minister Gabriel Mbaga Obiang Lima said that Equatorial Guinea remained an attractive investment opportunity, even as the fall in oil prices since June 2014 has led many companies to delay or cancel spending on new projects, especially costly deepwater developments.

Equatorial Guinea does possess certain competitive advantages, including existing infrastructure and a developed service industry that could help lower the risk on investment for both new and existing players. It has been free of political volatility and has decades of experience working with IOCs. However, Equatorial Guinea’s uneven track record in awarding new acreage highlights challenges facing the upcoming bidding round in an environment of lower oil prices and weaker investor confidence. Eight onshore and offshore blocks were awarded to a range of small and mid-sized players as part of the 2013 bidding round, but the 2014 round attracted limited interest despite repeated extensions, according to industry reports. Upstream news reported in March 2015 that while the government received several bids for four blocks offered via direct negotiations, 10 blocks available under competitive bidding attracted few offers. More recently, the government was able to sign just one out of five production-sharing contracts it had hoped to finalise in 2015.

Furthermore, there is evidence of tense relations between the industry and the government. In October, Gabriel Obiang Lima, who is also the president’s son, announced that ExxonMobil would not be granted an extension to its contract for the country’s largest field, Zafiro, even though the current production-sharing contract does not expire until 2023. The decision has been interpreted as part of a broader campaign by Obiang to pressure IOCs over their reduced investment in Equatorial Guinea, and follows a reported warning in September 2015 that he could block key projects if the firms failed to channel greater funds into the industry. The government has also refused to approve the development of Noble Energy’s Carla and Diega discoveries, citing project delays, and has blocked the sale of Hess Corp’s offshore assets to foreign bidders. According to a February 2016 report from Africa Energy Intelligence, officials have also threatened to cancel contract extensions for companies that fail to speed up the transfer of jobs from expatriates to local staff.

The decline in oil and gas revenues has curtailed state spending and added pressure on the government to extract greater benefits and revenues from the sector. Hydrocarbons account for more than 90 percent of the country’s revenues and the government’s efforts to diversify the economy – including through infrastructure investments under the umbrella of the Horizonte 2020 programmes – have largely failed. In the absence of a major shift in government policy, the industry is likely to remain under pressure over jobs and investment, and it is possible the ministry will seek to carve out a larger role for the national oil company, GEPetrol, which is headed by Engonga Oburu, a friend of the energy minister. Declining output from mature fields may further strain relations between industry and government, encouraging officials to intensify coercive efforts to secure the new investment necessary to stabilise production and state revenues. The withdrawal of oil services giant Schlumberger from talks with Ophir Energy in April about participation in a floating liquefied natural gas project off Equatorial Guinea marks a further setback for the government.

Regulatory uncertainty could also increase as the government implements measures to counter depressed revenues from oil and gas. Equatorial Guinea’s 2015 Financial Law cancelled all tax and customs exemptions granted to both foreign and domestic companies. However, the law is at odds with the terms of existing contracts agreed with IOCs, which provide exemptions in areas such as duties on imports and exports. In a January 2015 note, accounting consultancy EY warned that companies would have to renegotiate their tax exemptions with the finance ministry, raising serious concerns about the sanctity of the contracts and IOCs’ exposure to new channels for bribery demands. The arbitrary and inconsistent enforcement of regulations has long been cited as a challenge by investors in the country.

Investors will therefore view the new round with caution, especially considering the wider market pressures of the past 18 months. Both institutionalised corruption and uncertainty over who will succeed the ageing President Teodoro Obiang Nguema Mbasogo, who is one of Africa’s longest serving leaders and has been in office since 1979, are other reputational and political risks that could dampen investor confidence. Investigations by the US Senate in 2004 and 2010 and a number of NGOs have concluded that a significant share of revenues from the country’s natural resource wealth has been diverted to enrich the political elite. Underscoring this, in May, French prosecutors requested Second Vice President Teodorin Obiang, also the president’s son, face trial over alleged money laundering. The government has given no indication that it is prepared to tackle corruption or address the factors which enable it, including the outsized influence of the Obiang family and its associates over the economy. As such, the prospects for economic diversification and the investment necessary to reverse the continued decline in hydrocarbons production in the next one to two years remain weak.

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